Confidence plummets to 7-year low

Consumer confidence plunged in October, reflecting Americans' deepening concern about the shaky economy, a rapidly eroding job market and the persistent threat of more terrorist attacks.

The Conference Board said Tuesday that its closely watched consumer confidence index fell 11.5 points, to 85.5--the lowest level the measure has reached since February 1994.

"This is a very worrisome report," said Oscar Gonzalez, an economist with Boston-based John Hancock Financial Services. "With layoffs increasing, the economy apparently having slipped into a recession and the country at war, we obviously expected consumer confidence to be shaken, but not this badly."

The evidence of a dramatically darker consumer outlook, observers suggested, improves the odds that the Federal Reserve Board will opt to cut interest rates by a half-percentage point when the Fed's Open Market Committee meets Tuesday.

It also sets the stage for a string of potentially crucial economic reports due out later this week. On Wednesday, preliminary third-quarter gross domestic product data will be released. Most economists expect the report to show shrinkage in the U.S. economy, and depending how the government revises earlier figures, the report might show the nation has already met the conventional measure of a recession: two consecutive quarters of negative growth.

Thursday will see the National Association of Purchasing Managers issue its October report. And on Friday the government will disclose the latest jobless figures--an increasingly sensitive figure as airlines, manufacturers and other companies have moved to slash jobs in the wake of the Sept. 11 terrorist attacks.

Timely rebound unlikely

Lynn Franco, director of the New York business group's consumer research center, said the survey indicates that the public's outlook on economic conditions "is becoming increasingly pessimistic," and added that "widespread layoffs and rising unemployment do not signal a rebound in confidence anytime soon."

The Conference Board survey also reflects how "more people are now at risk of layoff or at least shorter workweeks," said Economy.com economist Sophia Koropeckyj. Consumers still like a bargain, however: Although plans to buy big-ticket items such as appliances are declining, she noted, the auto industry's zero-percent financing incentive programs have successfully shored up car-purchasing plans.

Wall Street scrutinizes the Conference Board's index because consumer confidence governs consumer spending, the biggest factor driving the broad economy. Economists had been expecting the Conference Board's monthly survey of 5,000 U.S. households to show a much more modest 1-point drop, to 96.

Stock market tumbles

The October survey's gloomier-than-expected reading played a prominent role in Tuesday's sharp stock market retreat. After falling 2.9 percent on Monday, the Dow Jones industrial average on Tuesday declined an additional 147.52 points, or 1.6 percent, to close at 9121.98. The technology-driven Nasdaq stock market fell 32.11 points, or 1.9 percent, to 1667.41.

The survey separately gauges consumers' views on the present economy and on expectations for the next six months.

"Ominously," said Chicago-based Banc One Capital Markets economist Anthony Karydakis, last month the sharpest fall showed up in the present conditions component, "which is more closely related to spending." Such slippage, Karydakis said, indicates that "psychology is turning decidedly sour, with potentially very adverse implications for spending in the fourth quarter."

Jobs report's impact eyed

It may very well get worse, suggests Hancock's Gonzalez. If Friday's unemployment figures turn out to be as dire as they're likely to be, he says, "it could be a crushing blow to confidence." Since a steady job market has helped sustain consumer spending and kept the economy afloat, he says, if the job market's woes continue "we could quickly see a sharper pullback in spending and a downward economic spiral that not even [Fed Chairman Alan] Greenspan can stop."

Gonzalez expects interest rates will either be eased slightly or held steady next week, "but we are facing a situation without precedent, so it's hard to guess the Fed's next move."

Coming on the heels of a 17-point fall in September, the consumer confidence index has taken its steepest nosedive since the 1990-91 recession, Jay Bryson, an economist with First Union Corp.'s Wachovia Securities told investors in a report issued Tuesday evening.

"Earlier this year, Mr. Greenspan had said that the `fabric' of consumer confidence hadn't yet been `breached,'" Bryson said. He added: "That loud ripping sound that was heard this morning was the `fabric' of consumer confidence being torn."